CinnabarRed's tax thread

[CinnabarRed]

This may be an act of supreme arrogance on my part - if so, I apologise profusely! But it seems that a lot of people have got questions about tax policy and the morality of taxation, which is my professional field.

So this thread is your chance to ask me any questions you have in this general area. I promise to explain what I know, be honest and clear when I don't know the answer, and distinguish between facts (for which I will provide a reference) and my opinion.

So over to you! I'll be back in the morning to answer any questions posted tonight.

PS: I won't be providing taxation advice to anyone!

The spending cuts are to bring our expenditure in line with our income. i.e to reduce the annual deficit.

The bank bail out was more or less a one off. It was the recession (resulting from the banking crisis) which has increased our deficit. As tax revenues have gone down and public sector costs have risen.

ps just revealing my continued lack of understanding of what the taxpayer really did for the banks... Did we or did we not provide any "real" money for the banks in return for shares? And if we did, surely the UK had to borrow money in order to be able to do that? In which case, surely our deficit is hugely increased in the long term as a result of the interest we have to pay back on money borrowed by the UK in order to finance the bailout and continue with functioning public services? Or did we largely just promise to provide money if necessary so that the banks could start doing business again rather than worrying about bad debts? Getting lost in a quagmire of despair and misunderstandings again.

rabbit - you are correct. The interest on the money borrowed for the bank bail out is an ongoing cost. But there is significant deficit over and above this. This 'structural deficit' is really what the cuts are about. With any luck the bank related bit will be paid back eventually. In fact there was some talk of it in the FT today.

Another ignorant question. How does the Asset Protection Scheme work? Surely we need to be able to show that we have cash available to pay up under this if necessary? How is this accounted for and what effect does it have on the country's finances, given that we don't know whether we'll ever have to pay up under it and if we do, how much? Is it insignificant small change?

I agree that part of the jump in deficit is the usual double effect of tax take down / benefits up.

But my understanding is (happy to be corrected) that the cost of the bail out of the banks was a very significant part of government spending in 08/09 and 09/10.

It is also of course usual to 'ride out' to some extent the effects of recession on government spending/tax take.

Hi Rabbit

We did both provide real money and create an insurance scheme (APS) for the banks. But not all banks took out the policy as its not cheap and comes with a lot of conditions. So for example Barclays & HSBC have survived entirely on their own without any government support.

Now we did borrow a lot of money to buy the shares in banks we did take over (eg. RBS, Northern Rock) but at the same time we own them now and they are assets.

But like JackStar says, there's been a structural deficit for decades. Yes the banks added to it but its a one time hit and we have assets which one day (soon hopefully) we can sell and make a tidy profit on. So the real problem is not with the bank bailout but the structural deficit.

Let me give you an analogy. Say you earn £3000 per month but you spend £3300 per month and have done for the last 30 years. Then the crap hits the fan and you end up having to buy a load of shares you didn't want and you had to borrow say £1000 extra to do it. However, you think after 3 years, you can flog them for £1500.

What's your biggest problem? The £1000 you had to borrow which you will probably get back? Or the fact you are overspending by £300 still each month and have done for 30 years?

This is why I hate all the banker bashing. Its not that I think they're squeaky clean. It's that whilst we're all bashing them, we're not targeting the real villains here, the MPs. The people who have run up trillions in debts in OUR name and telling us we can keep spending more than we earn because economic growth will solve our problems. Bullshit. It's been 30 years and we're still addicted to spending like a crack cocaine addict.

Lastly, as mentioned, APS is an insurance scheme and like most insurance companies, they have substantial assets but operate on the principle that they only pay out a percentage on claims. Same here. Not all the banks bad debts will be bad and the banks have an excess of £60billion. So its not chump change.

OK, three separate concepts are coming out here.

The bail-out of Lloyds and RBS involved the government subscribing for new shares in those banks. Actual cash changed hands, and the government holds its shares in Lloyds and RBS as assets. The government raised the cash to buy shares in Lloyds and RBS by borrowing (in fact, issuing gilts to investors), and it does have to pay interest, but not capital, on the debt.

The problem is that the current value of the Lloyds and RBS shares is £5bn less than the government paid, so if it sold them today it would make a stonking great loss and wouldn't be able to pay back all of the debt it took on to buy them. Its plan is to keep holding the shares until they're worth at least as much as the initial investment.

(As an aside, it's easy to value shares that're traded on a stock exchange like Llyods or RBS - becasue there's a quoted share price for one share at any given time.)

The Asset Protection Scheme (APS) is an insurance scheme designed to help banks with lots of bad loans. Bad debts on the books make banks reluctant to engage in further lending because their capital base is under threat. Once the government insures banks against further losses, the argument goes, they can get back to lending to firms and households to help the economy get back on its feet again. Banks agree with the Treasury how many assets and what type of assets they can insure. The Treasury charges a fee for the insurance it is providing.

I believe that the government is currently making a profit on the APS because it's collecting fees but hasn't yet had to pay anything out.

The deficit is usually defined as governmnet spending, plus interest payments on government debt, minus tax revenues. Note that it's interest on debt, rather than the full capital amount of the debt.

It's helpful to split the deficit into two parts - the cyclical deficit and the structural deficit. The cyclical deficit arises because of the business cycle (that is, the trend for upswings and then downturns in the economy). During the bad times governments tend to spend more than they take in tax revenues (as you say, partly because unemployment benefit claims go up, partly because tax revenues go down) - as Takver rightly says governments typically ride out cyclical deficits because when the good times roll then tax revenues bounce back and benefit claims fall as people get jobs.

A structural deficit arises when a government consistently spends more than it takes in over a longer period of time.

The UK does have a structural deficit, and in my view Gordon Brown has to take responsibility for that. As Chancellor he took the misguided view that his economic policies had put an end to the business cycle - he thought that the good times would last forever. That meant he felt free to keep spending, because there would always be more tax to collect tomorrow. He didn't put anything aside for a rainy day - and as a result Britain went into the recession already saddled with the biggest structural deficit in peacetime history. Not great.

It's the structural deficit that we're all working so hard to pay down. That and the money we actually borrowed (because failing to pay down the debt itself would put the wind up the financial markets so that they demand more in interest payments and might stop lending altogether).

In my view, Labour were right to bail out the banks and keep spending through the recession, to stimulate the economy and prevent total meltdown. The current goverment is right to cut spending, although I wouldn't cut it as hard or as fast. That said, Britain is now one of 12 nations rated "extreme risk" in the Fiscal Risk Index compiled by global analysts Maplecroft.

The UK was ranked 10th in the list of 163 countries because of its high public spending on health and pensions, massive borrowing and shrinking working population. Italy topped the international league table, followed by Belgium, France, Sweden, Germany, Hungary, Denmark and Austria. Japan came ninth, the only non-European country rated "extreme risk".

As an aside, tax yields were up in January, about £4bn more than expected. Corporate Tax and VAT have both recovered well. Income Tax is also up, and it won't be down to the direct effect of the 50% tax rate because the January payment is for the previous tax year.

Thanks Cinnabar - for some reason I wasn't able to post on you're thread this morning.. But your answers are better than mine would have been.

Hi, CinnabarRed - which countries are most successful at doing the opposite of ours and bring in more money as revenue than they spend?

I know the government must currently be making a profit on the APS, but surely any insurer, even the UK Treasury, has to have enough reserves to cope with reasonably predictable losses plus a bit more as a safety margin? Does the government have a specific slush fund for possible payments out under the APS? Or will it just borrow more money in the event that it ever has to pay out under the APS? I know this isn't directly related to the deficit as such, but was just wondering how much money has to be instantly available to the UK government but which cannot be spent on anything other than making good bank debts under the insurance scheme if the need should arise? Am I making any sense???

Oops - your thread .

Tish and pish jackstarb - your answers would have been great and I care nothing for typos!

Rabbitstew - the government isn't sitting on reserves of cash to cope with any losses on bad debts. If it came down to it, the government would borrow. Governments including the UK borrow and lend all the time, so it's not as if the UK would need to raise a specific gilt issue for this purpose alone.

China has an enormous current account surplus. The oil rich nations such as Saudi Arabia and Kuwait are generally cash-rich. The high tax Scandinavian countries run surpluses. Germany and Japan also currently have surpluses, but that's largely because in the past they've been lenders rather than borrowers and they've recently received large capital debt repayments.

The US has the largest current account deficit by a huge margin. European jurisdictions, including the UK, follow close behind. Then the poor developing world.

On a per capita basis (i.e. the deficit per person) the US, UK, Australia and Europe are all in deep trouble.

I really do think that once the US wakes up to how deep a hole they are in then we're in for another economic crisis.

I just don't think Ma & Pa have any clue and their republican politics are based all on low tax, small government but at the same time big spending (to appease the people). Something has to give.

They're slowly waking up to the fact now but I don't think they quite realise the scale & magnitude.

Thanks, CinnabarRed.

Why do so many of our politicians seem to emulate the way the US arranges its affairs, then? Is the mindset still to be a net borrower at the end of the day, because we don't have the natural resources, lack of democracy and/or high tax regimes of the net lenders? And do I take it that Japan and Germany will shortly be in deficit, if they are in the top 10 in the Fiscal Risk Index???

ps when was the UK last a net lender, rather than a borrower???

pps this is all very interesting. I appreciate someone giving the time to answer my questions, however stupid!

On country by country reporting....

Thanks for this CinnebarRED. The quality of undercover expertise in Mumsnet is sometimes just excellent!

I have mixed feelings about ocountry-by-country reporting. I agree that the canpaigners are often ranty, but it doesn't necessarily mean they are wrong (or all wrong).

Can I pick up on a couple of your points?

1. "The people best placed to judge whether companies are paying the right amount of tax in a given jurisdiction are the local tax authorities." -- The point is though that multinational companies are operating accross multiple juristrictions and have considerable leeway to organise their tax affairs to stay within the laws, but minimise the tax take. As long as this is not transparent it is difficult to mobilise citizens to call for changes in the law if the results of this are unjust.

1. "Tax campaigners believe that if they had this information then it would reveal all kinds of nefarious behaviour from companies..." (please do post on the transfer pricing question, I would love to understand it better) --- The base of the transfer tax campaign argument as I understand it is the 'sunlight thesis' of doing things openly and transparently. There is good reason to think that more nefariousness (or at least behavior that is not in keeping with a companies image and public positions) will go on the more things are behind closed doors and not in public.

1. "Company accounts are prepared for the benefit of the company's stakeholders - shareholders, lenders, employees, customers and suppliers, the tax authorities - to allow them to judge the performance of the company." Right, but citizens who use the public services that depend on those tax revenues are also stakeholders - and it is part of the social contract between business, state and individuals that each contributes -- businessses depend on public services for roads and infrastructure, security, a healthy and educated workforce, the rule of law etc.. All that costs money and so it is part of their responsibility to pay taxes. Putting some public numbers on that seems fair enough, to enable informed public debate.

1. "There is a real and genuine problem with corruption in developing countries..." I agree. But aren't anticorruption campaigners in developing countries in support of CBC reporting? as with reporting of oil and gas revenues to governments (The extractive industry transparency initiative etc.. - the arguments about admin cost, what use is the data, who for etc.. also applies in this case..)

Where I agree with you is that it is not a simple 'do it tomorrow' matter as the campaigners say. I think what will happen is that companies that are feeling the heat on this, and those whose businesses mean they don't do a lot of offshore tax havenable stuff, will start to report in some way on a CBC basis - to demonstrate and justify that they are good corporate citizens and to put the record straight (e.g. barclays...) This then enables a public debate on what is fair, what should be reported etc.. Often ranty canpaigners are needed to kick off more nuanced discussions, that others would rather just keep a lid on.

As more and more business can be conducted virtually, but public services remain geographically tied, the question of how we fairly and sustainably fund these things is an important one...and yes picketing Switerland may be on the cards!

Himalaya, that is an extremely helpful post.

One slightly OT note - many on this thread (and elsewhere) lay the blame at Gordon Brown's door for failing to increase taxes/restrict spending in the boom years.

I would agree that there are undoubtedly many areas where he was at fault (not only failing to raise more taxes in the good times, but also failing to ensure robust regulation of the financial sector, and relying on that sector to the exclusion of manufacturing).

But I think it is also important to recall that throughout the 1980s there was a one-off opportunity to use North Sea oil revenues to provide a long term financial benefit to the nation - and that this opportunity was passed over in favour of a low tax regime.

In the same way, although unfortunately I don't know enough of the details to post, my mother (who works in local government finance, so is well informed on the subject) tells me that through the 1980s a substantial amount of cash was taken out of local govt pension funds because it was (conveniently) assumed that high rates of share growth would continue, and therefore they were over-funded. I want to find out more about this, as I think it is a very important point to be aware of now that public sector pensions are being represented as an unfair drain on the country.

Thanks CinnabarRed - a really informative thread. Not posting, just lurking.

Sorry I?m late to the tax thread party, but had been directed to some of its content on another thread and had posted there. I thought it only polite to post my reply here rather than whispering behind cinnabarred?s back!

I think it's important to decide what we mean by "We really do need them [the banks] to be here and to be doing well." If we mean that we need the banks to be expanding and chasing the biggest profit at any cost, as has been happening up to now, then I think that we need to reassess our views of what it means for a bank to do well.

Someone on the other thread described the tax exemption thus: " It's about not killing the goose that lays the golden egg". That anyone still considers the financial service industry to be the goose that lays the golden egg makes my head spin. The Office for National Statistics has just released its estimate that the Royal Bank of Scotland and Lloyds banking group alone have been bailed out to the tune of £1.3 trillion. This does not include the figure for bailing out Northern Rock and Bradford and Bingley. I'm afraid I just can't get excited about the banks' £50 billion taxes when I read those figures.

Others above have stated that reform of the banks has already begun. Then I'm afraid they are not doing a very good PR exercise of publicising these reforms, because people need to see that, before banks are given any tax incentives to grow bigger and chase profits overseas, they have reformed to the extent that they won't find themselves begging governments to bail them out again - and i don't think it's hysterical posturing to suggest that the bubble could burst again. if they are already reforming, why the secrecy? why are the public being shushed with "stop the bank bashing" instead of details of reforms.

A few specific points that I disagree with. Cinnabarred says that it is not the case that losses will still be offset for the large corporations who will be exempt from these taxes.The government's discussion document seems to state otherwise, with options being suggested and affordability being discussed.

This in turn impacts on Cinnabarred's claim that the measures are meant to help small businesses. It seems to be a win-win situation for large corporations, but only they will benefit from tax exemption and some form of loss relief if the measures are indeed introduced. small businesses need not apply.

Finally, Cinnabarred dismisses the term "race to the bottom" thus:

" You may have heard the phrase "race to the bottom" - it's the idea that "good" jurisdictions have to sink to the level of "bad" jurisdictions in order for their tax systems to remain competitive. But I don't see that in practice. Instead, what's happening is an emerging consensus in the international tax community about the norm of best practice, with intense pressure on non-compliant countries to step in line"

but I'm afraid I don't see how this "emerging consensus" of "good practice" differs from the concept of the race to the bottom.

I do hope that more can be done internationally to regulate the banks to ensure that they are working for society and not, as recently, working to society's detriment. I'm naive that way.

Oh and one more (naive) question... about banks upping and leaving. Can the banks who are now owned or part owned by the government actually, legally do that? Would anyone have them?

Since posting that, I?ve been discussing some of Cinnabarred?s post with friends who have more knowledge than me in the field (wouldn?t be hard!) One friend who researches corruption in Africa felt very strongly that Cinnabarred?s call for corruption to be stamped out in developing countries doesn?t appear to make any link to the manner in which tax havens are complicit in corruption and corrupt activities, either by actively courting dodgy dealers to secure their business or by developing legislation such as ?flee clauses? that prohibits any kind of oversight or investigation.

Thanks for the posts, RaggedRobin. A very interesting addition to the thread.

I agree, its really helpful to have a range of informed perspectives.

RaggedRobin's points bring to mind my own thoughts on what fairness actually means in most peoples' minds. I think most people are thinking of the wealth creators in this country sharing their wealth out more fairly within this country, without stopping to consider how that wealth has been made in the first place and whether they want to share in a part of what it stands for. And how much in reality do people want to help the poorer countries to become richer, if it will just mean they will end up wanting more of a share of the food we like to eat and the petrol we like to put in our cars? I don't think the world can withstand all human beings having the lifestyles we enjoy and covet for ourselves (and by ourselves, I don't mean the hugely wealthy even by our own standards, I mean the person on average income or less). So, it must mean that we all have our own personal level of acceptable selfishness.

Hi Cinnabar- if you're still reading, please answer me this -

Why does the US tax it's citizens wherever they live in the world (i.e. even if they're not resident in the US) but most other countries don't. I know they only pay the difference between what they pay where they live and US rates, but it seems most other countries don't even do this.

Therefore, a UK citizen living in the UAE pays no income tax on their UAE salary, whereas a US citizen would have to pay US tax.

Is it simply because it's too difficult/expensive to administer or are there other reasons?

Rabbitstew - its a very interesting point to think about and a very long standing issue of concern IIRC George Orwell writes at some length in the Road to Wigan Pier about the extent to which every relatively prosperous lifestyle in Britain rested on the back of both British miners and the exploited Empire countries (might have been one of his essays, come to think of it).

Interestingly, his point was that union members who campaigned for the ending of the Empire needed to accept that this would have drastic effects on the standard of living of ordinary British working people. In practice, as we see now, that didn't happen, and the ex-empire and other countries continue to be quite effectively exploited without the need for empire.

More practically speaking, I think that it is quite possible to visualise a situation in which British people had considerably fewer material goods, but that wealth was more equally shared (particularly with regard to land and housing), and imagine that overall net happiness could easily be higher - whilst at the same time we were consuming a smaller share of the world's resources.

I very much liked Mat Coward's recent novel Acts of Destruction which tries to imagine a scenario along these lines (its also a good detective novel too :) )

Thanks, Takver. I might get "Acts of Destruction" and see what I think!